Oct 2011
Globally, risk assets rallied post the EU summit, on expectations of relief from the sovereign credit crises. 3Q GDP for the USA was also better than expected. Separately, the Reserve Bank of India's signal of a likely pause in monetary tightening also boosted investor sentiment. Key growth indicators, including for the services sector, are also showing substantive signs of a slowdown. August IP increased at a significantly lower than expected 4.1% oya. The slowdown was broad based with notable moderation in Consumer and Basis goods.
Equity
Nifty gained a significant ~8% over the month, as globally, risk assets rallied post the EU summit, on expectations of relief from the sovereign credit crises. Reserve Bank of India's signal of a likely pause in monetary tightening also boosted investor sentiment. Domestic institutional investors (DII's) were sellers while Foreign institutional investors (FII’s) were buyers over the month. FII's bought US$346.5 mn over October. Over 2011 so-far, FII’s have been marginal net buyers of US$398 mn. DII's sold US$466 mn of Indian equities. Insurance companies sold US$ 423 mn, while Mutual funds sold US$43 mn over the month. Over 2011 so-far, insurance companies bought US$3,680 mn and mutual funds have bought US$ 1,023 mn. Over all investor sentiment remains patchy, as evidenced in weak trading volumes.
Fixed Income
Treasury yields continued its northward climb ending the month (October 2011) 45bps higher at 8.89% from 8.44% in previous month. In its much-awaited second quarter monetary policy review, RBI, in line with expectations, raised repo rate by another 25 bps to 8.5%, taking the cumulative hikes to 375bps since March 2010. The RBI indicated that with inflation conforming to expectations post-December “further rate hikes may not be warranted”. Also, in a surprise announcement, saving rates were deregulated with immediate effect with banks now free to offer interest rate on saving accounts as they choose. September inflation numbers moderated marginally to 9.72% from 9.78% in August with “core inflation (ex food & fuel)” printing in at 7.62% still significantly above the RBI comfort zone. However as a piece of good news, retrospective revisions to previous inflation prints continued to remain muted for a second, successive month.